The Associated Press Published on Monday, June 27, 2022 5:54 AM EDT Last Updated on Monday, June 27, 2022 5:54 AM EDT
Russia is about to pay off its foreign debt for the first time since the Bolshevik revolution more than a century ago, further alienating the country from the global financial system following sanctions imposed by its war on Ukraine.
A 30-day grace period expired on Sunday for interest payments that were initially due on May 27th. But it may take some time to confirm a default value.
“It looks like the banks have complied with international sanctions and withheld payment,” said Chris Weafer, a veteran Russian economics analyst at consulting firm Macro-Advisory.
Last month, the U.S. Treasury Department put an end to Russia’s ability to pay its billions of debts to international investors through U.S. banks. In response, the Russian Ministry of Finance said it would pay the dollar-denominated debts in rubles and offer “the opportunity for subsequent conversion to the original currency.”
Russia says it has the money to pay off its debts, but Western sanctions have frozen its foreign exchange reserves. Kremlin spokesman Dmitry Peskov told reporters at a conference call on Monday that “there is no reason to describe this situation as non-compliance,” saying Russia has paid but cannot be prosecuted because of the sanctions.
The United States and the European Union have deliberately created “artificial obstacles for Russia to pay its sovereign debt to put the default label on it,” Russian Finance Minister Anton Siluanov said last week.
The other argument is that “this happened because of the sanctions, but the sanctions were totally under your control,” said Jay S. Auslander, a senior sovereign debt lawyer at the Wilk Auslander firm in New York. “All this was under your control, because all you had to do was not invade Ukraine.”
Here are the key things to know about a Russian default:
HOW MANY TEN RUSSIA?
About $ 40 billion in foreign bonds, about half to foreigners. Before the start of the war, Russia had about $ 640 billion in foreign exchange and gold reserves, much of which was abroad and is now frozen.
Russia has not defaulted on its international debts since the Bolshevik revolution, when the Russian Empire collapsed and the Soviet Union was created. Russia defaulted on its domestic debts in the late 1990s, but was able to recover from this default with the help of international aid.
Investors were expected to default on Russia for months. Insurance contracts covering Russian debt are priced at an 80% chance of default for weeks, and rating agencies such as Standard & Poor’s and Moody’s have placed the country’s debt in scrap territory.
HOW DO YOU KNOW IF A COUNTRY IS BY DEFECTOR?
Rating agencies may downgrade the default rating or a court may decide the issue. Holders of bonds that have credit default swaps (contracts that act as insurance policies against default) can ask a committee of representatives of financial companies to decide whether the default on the debt should cause a payment, which is not yet a formal declaration of non-payment.
The Credit Derivatives Determinations Committee, an industrial group of banks and investment funds, ruled on June 7 that Russia had not paid the necessary additional interest after making a payment on a bond after the maturity date. of April 4th. But the committee postponed taking further action due to uncertainty over how sanctions could affect any agreement.
WHAT CAN INVESTORS DO?
The formal way to declare default is if 25% or more of the bondholders say they have not received their money. Once that happens, the provisions say all other foreign bonds in Russia are also in arrears, and bondholders could apply for a court ruling to enforce the payment.
Under normal circumstances, investors and the delinquent government usually negotiate an agreement in which bondholders receive new bonds that are worth less but at least give them partial compensation.
But sanctions prevent deals with Russia’s finance ministry. And no one knows when the war will end or how much the unpaid bonds could be worth.
In that case, declaring default and suing “may not be the wisest option,” Auslander said. It is not possible to negotiate with Russia and there are so many unknowns, so creditors may decide to “hold on for now”.
Investors who wanted to get out of Russian debt have probably already headed for the outflows, leaving those who may have bought bonds at discounted prices in hopes of taking advantage of a long-term deal. And they might want to keep a low profile for a while to avoid being associated with war.
Once a country defaults, bond market indebtedness can be cut until default is resolved and investors regain confidence in the government’s ability and willingness to pay. But Russia has already cut itself off from Western capital markets, so any return on lending is a long way off anyway.
The Kremlin can still borrow rubles at home, where it depends mainly on Russian banks to buy their bonds.
WHAT WILL BE THE IMPACT OF THE RUSSIAN DEFECT?
Western sanctions for the war have sent foreign companies to flee Russia and disrupted the country’s trade and financial ties with the rest of the world. The defect would be another symptom of this isolation and disruption.
Weafer says a default would not affect the Russian economy right now because the country has not been indebted internationally for years amid sanctions and is making a lot of money exporting commodities like oil and natural gas.
But in the longer term, when the war is resolved and Russia tries to rebuild its economy, “this is where the legacy of default will be a problem. It’s a bit like an individual or a company getting a bad score. credit, it takes years to get over it, ”he said.
Investment analysts cautiously calculate that a default by Russia would not have the kind of impact on global financial markets and institutions that arose from a previous default in 1998. At the time, Russia’s default on domestic bonds in ruble led the US government to intervene and get banks. to rescue Long-Term Capital Management, a large U.S. hedge fund, the collapse of which was feared could have shaken the broader financial and banking system.
Bondholders, for example, funds that invest in emerging market bonds, could suffer serious losses. However, Russia only played a small role in emerging market bond rates, limiting losses to fund investors.
International Monetary Fund managing director Kristalina Georgieva has said Russia’s default on government bonds would be “definitely not systematically irrelevant.”
But Weafer says it could have a domestic effect by adding pressure on global debt markets and making investors more risk-averse and less willing to advance money, which “could very well lead to more defaults in other emerging markets.”